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The advent of the globalization phenomenon has led to an ever increasing demand for connectivity. This urge for greater connectivity has lead to 8% per annum growth in internet users since 2008. With the world population penetration of only 34%, this trend is likely to continue in the future. Due to this growth in internet users, there is high potential for internet based businesses.

In order to gain from this trend, I have selected three main industrial players for further analyses. Yahoo Incorporated (NASDAQ:YHOO), Zynga Incorporated (NASDAQ:ZNGA) and Facebook Incorporated (NASDAQ:FB) are among the top most traded securities on the NASDAQ Stock Market, with three months average volumes of 19.8 million, 36 million and 54.5 million, respectively. These stocks have seen stable price appreciation since the middle 2012. The mobile usage for internet is increasing and all three companies are focusing efforts towards mobile users in their content. All three companies have worked aggressively towards gaining growth in the mobile and tablet content provider's industry.

In order to evaluate these stocks, I will make a comparison based on some key ratios and then using the multiples approach, I will gauge the upside potential for each stock.

Comparative Analysis

Key Stat

YHOO

ZNGA

FB

Rev Growth (%) (3-year Avg)

-8.3

119.3

62.5

EPS Growth (%) (3-Year Avg)

98.4

-5.1

38.7

Average Expected EPS

1.1

-0.1

0.6

Source: Yahoo Finance

The Internet Information Providers Industry has shown a CAGR in revenues of 14.9% per annum over 5-years. Based on this fact, ZNGA and FB have performed better than the market, with ZNGA achieving the highest revenue growth amongst its peers. However, as shown in the above table, it is evident that neither ZNGA nor FB have been able to translate their revenue growth in EPS. YHOO has been able to show tremendous growth in EPS (98.4%) despite its negative revenue growth. The reason for this is that YHOO has been able to improve its margins substantially over the years and FB and ZNGA (in particular) have seen declines in margins.

Key Stat

YHOO

ZNGA

FB

Industry

Operating Margin (NYSE:TTM)

11.36

-14.28

10.57

17.0

Net Margin

79.1

-16.4

0.6

18.7

Asset Turnover

0.3

0.5

0.5

-

ROA%

3.2

-2.1

3.1

-

ROE%

29.1

-11.7

0.6

13.6

Debt/Equity

0.0

0.1

0.2

0.1

Source: Morningstar

ZNGA has been facing losses over the years, as can be seen by the negative Operating and Net Margins. Between YHOO and FB, YHOO has performed better. However as shown in the table above YHOO's Net Margin is greater than the Operating Margin. This is because the company has seen a large increase in its Other Income head in 2012. If we adjust the earnings the Net Margin stands at 20%. Even with the adjustment in earnings, YHOO has outperformed its peers in terms of efficiency.

Similar to the case in margins, ZNGA faces negative ROE and ROA due to losses over the trailing twelve months. YHOO has been able to outperform its peers and the industry in terms of profitability, with an ROE of 29.1%, which is far superior to its peers and more than double the industry's average.

YHOO's returns look even more promising due to its lower than average risk level, depicted by the debt/equity ratio. The company is operating at zero debt level, whereas ZNGA and FB are operating with a debt/equity of 0.1 and 0.2 respectively.

Key Stat

YHOO

ZNGA

FB

Industry

PEG Ratio

1.5

N/A

1.6

1.2

Expected Growth % (per annum)

13.0

21.0

29.0

19.3

Source: Yahoo Finance

The growth prospects of the industry are very promising, with an average per annum growth over the next years expected to be at 19.3%. Although ZNGA and FB are expected to achieve higher growth than YHOO and the industry, but as indicated by the PEG ratio, buying into this growth rate is expensive for investors. YHOO's PEG ratio is better than its peers, but all three companies are looking slightly overvalued based upon PEG ratio.

Valuation Based on Comparables

Multiples

YHOO

ZNGA

FB

Average

P/E

25.2

N/A

1826.0

28.1

P/S

5.2

2.1

12.7

3.9

P/B

1.8

1.5

5.4

5.7

EV/Sales

4.3

1.3

11.4

4.7

EV/EBITDA

16.4

28.1

48.8

20.4

Valuation Matrix for TDC

Average Multiples

YHOO

ZNGA

FB

Cash per Share YHOO

Cash per Share ZNGA

Cash per Share FB

P/E

28.10

0.92

0.00

0.02

P/S

3.90

4.18

1.73

2.54

P/B

5.70

13.06

2.34

4.98

EV/Sales

4.70

4.18

1.73

2.54

3.80

1.64

4.04

EV/EBITDA

20.40

1.20

0.07

0.50

3.80

1.64

4.04

Equity Value per Share

YHOO

ZNGA

FB

Value Based on P/E

25.85

0.00

0.56

Value Based on P/S

16.30

6.75

9.91

Value Based on P/B

74.44

13.34

28.39

Value Based on EV/Sales

7.13

1.03

4.99

Value Based on EV/EBITDA

25.97

2.17

12.84

Weighted Avg. Value

27.93

2.98

9.63

Current Price

22.09

3.34

25.86

Expected Return

26.45

-10.81

-62.76

Undervalued

Overvalued

Overvalued

In the above table, the weighted average value of each stock represents its calculated fair value. In order to compute the Weighted Average Value of the stocks in the multiples based approach, greater weights are assigned to those multiples that better depict the economic reality of the company.

Compared to the current market price of each stock, FB and ZNGA are overvalued relative to the market and YHOO is relatively undervalued. At the current market price, YHOO has an upside potential of 26.45% while ZNGA and FB are expected to provide negative returns of 10.81% and 62.76% respectively.

Why YHOO is the Best Bet

YHOO appointed Marissa Mayer as President, CEO and Director in July 2012. Prior to joining YHOO, Marissa has served as the Vice President of Local, Maps and Locations Services at Google Inc. Ever since her arrival, YHOO has made concerted efforts to establish itself in the mobile and tablet services sector, and she has said in an interview:

At some point in the future, Yahoo will have to become a predominantly mobile company.

YHOO recently acquired Summly from a British teenage programmer. This is a fifth small acquisition in the past five months by YHOO, all targeted to boost the company's presence in the Mobile and Tablet services industry, which is a fast growing sector. These acquisitions not only bring software to the company, but also bring in talented engineers who would help the company move forward into this sector. These efforts will eventually be translated into yahoo's financials.

Conclusion

Based on my analysis above, the upward trend in YHOO's stock is likely to continue in the future. With the company's continuous efforts to develop its expertise in the smartphones and tablets market, YHOO is likely to achieve high revenue growth in the future. Based on future growth prospects and the stock valuation, I would recommend buying YHOO in order to post profits into your portfolio.

Source: Comparative Analysis Of Yahoo, Zynga And Facebook